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Godzilla Nova Rasa: The Australian Corporate and Government debt market ZINC 530 Assignment 2 -structure: Ruin Karri 26. 08. 2013 * Executive summary ere purpose of this report is to review corporate and government debt market of Australia. The report illustrates effect of SGF to Australian corporate and government jibe markets and how Australia managed debt market during that period. The main Ending are that Australian economy was not effected in that extend as rest of the Nor.
Australian banks were concentrated in domestic market rather than investing )offshore. Also government provided guaranty which supported debt market and ;paved it from default. Furthermore, it examines the shortage of supply in debt market. There are only a few offers of corporate debt available for retail investors :wrought ASS. Analyze shows that the most of Australian debt issuers are rated as low -sis investment companies which make issued securities high liquid and increases jammed among investors who seeks for low risk and fixed income.
It also analyses ‘racing, interest rate and guaranty that different bonds offer. Government bond are :he closest security to risk free investment and yields are the lowest compliance with -sis. The report analyses different sources (such as ARAB, CABS S;P, ASS and other Uncial institutions), related to the debt market of Australia and provides overview current situation with expectations. It also demonstrates the role of foreign investors in debt market of Australia with recent changes. Rabble of Contents introduction 4 Corporate debt market 5 preferment debt Market 8 Conclusions 13 13 {deterrence 1.
Introduction ere Debt market plays crucial role in economy of every country as it is one of the main sources of finance for both Corporate and Government. Furthermore, an )organization tries to maintain optimal debt level vs.. Equity that would make an )organization attractive for the investors dames ; John, 1980). Also, to be able to :intro cash flow and pay current liabilities on time. On the other hand, issuing ;security is costly and there is a high requirement to issuer. For that reason mainly Sank and other multimillion companies issue bond. Small companies prefer to take non form financial institutions.
The role of debt market for the government is quite similar as for corporation: to be able to control cash rate as per monitory policy and -jugulate budget cash flow. Australian government issues treasury bills (short term) and treasury bonds (mid-term and long term). Also different states can issue bond ;securities to finance Public Trading Enterprises that called semi government bonds. )emend for SMS and SUB from offshore investors has increased after SGF benefiting Australia debt market. Government and the financial institutions are the key players n Australian debt market.
The recent changes in legislation and requirements for securities, via implementation of Basel Ill are expected to have positive impact on the :reporter and the government debt markets. 2. Analyze of Corporate debt market. Rhea are a few different type of corporate bonds can be purchased in Australia debt market: Fixed rate bonds with fixed coupon; Floating rate notes with variable coupon; inflation-indexed bonds with fixed coupon plus inflation rate; Hybrid bonds with )option to turn it to equity and Kangaroo bonds that issued by non-residents (Phillips, 2012).
Australian corporate debt market is one of the most regulated debt markets n the world. The reason for that to secure debt buyers from loss of the investment as t did happen in US during SGF by selling high risk Cods with low yield rate of return. Causes of this fact, ordinary people perception was that Cods have low risk. In the 2nd Cods were not secured according to risk. In Australia, corporate bonds provide investors with regular interest payments that might be fixed or not fixed. Also Easements are mostly secured by the issuing company’s cash flow, bank or the )organization’s assets.
This way government can stop speculation with high risky jibes and protect pension funds and retail investors. Lately, corporate debt market is ;worth of supply. Investors, who are seeking for low risk and secured investment, do not have many options in terms of debt investment. Furthermore, debts are mostly ;old through wholesale market rather than ASS. Retail investors have to invest to self- managed funds (trusts) in order to be able to invest to debt through wholesale. Table I clearly illustrates that only 0. % of the self-managed super fund allocated to debt ;securities. Comparing to other fixed rate securities, corporate bonds vary rare as well. Zorn example, there were only 5 issues with $400 million market capitalization, which only 1 . 1% (see table 2) among ASS traded ones in November 2012 (O’Brien et al. , 2012). High risky bonds should provide higher return according with the risk related ten company. Also Donnas are less rolls than equally Issued Dye ten same company as n case of insolvency of an organization debt holders paid first and only after ;hardliners.
Table 3 clearly illustrates that yield return increases according to risk, Inhere government bonds are equalized to free risk issues (Davis, 2012). Corporate Jonas yield coupon rate might fluctuate depending on rating of the company that -effects risk of the company. Investors also can gain or lose by selling bond in ;secondary market. In case if coupon rate prevailing current interest rate in the market, they sold at premium price and vice versa. In last arrears (2009-2013) coupon -ate has declined and according to S&P report, average rate of return was 8. 8% corporate bonds (Graph 1) whereas standard deviation of return was only 3. 1%. SEX 200 (Graph 2) index was 0. 52% for the same period with 22. 07% standard expiation. It illustrates that investing to corporate debt is not only less risky but also night pay higher return. Rape 1 . S&P/ASS Corporate bond index rape 2. 200 index ere facility to issue covered securities has also assisted in the repurchasing of assured debt, as banks can offer nominees with AAA obligations an alternative asset 😮 finance in. Covered bonds have created opportunities to banks to expand their investor base. They have delivered issuers with a comprehensive capital source less ;insensitive to risk affairs than usual unsecured funding.
Currently Australian covered ;securities value at a level close to much longer established covered bond programs Debacle, 2013). According to NAB report (2012), the overall situation is expected to hanged due to regulatory changes. In recent years, retail investors (who are seeking low risk investments) could deposit they money to bank and earn interest from around 2. 5% interest or act through Trusts and invest to different debt issues. :impasses that are looking for investments usually finance it with bank loans as issuing bond is too complicated and costly.
The companies that big enough as Newspapers and BP to issue bonds without guaranty, prefer to sell it to institutional investors trough wholesale. BP issued $1 ban worth bonds in the December quarter n 2012. It was recorded as the largest deal non-credit wrapped transaction in local market (Debacle, 2013). Minimum investment was around a half million dollar. _isolation must simplify requirement for issuing security and standardize the forms. Changing the requirements and legislations might increase corporate bonds in the market and make it available to the public (retail investors).
Also small companies vacuole be able to finance different projects with lower cost of finance as banks are not involved. On the other hand it would increase the risk for the investors as companies McCollum not be backed up as they are currently. . Analyze of Government debt market. Wisterias government debt is not only most secured but also provides variety of Jefferson securities: Commonwealth Government bonds, treasury indexed bonds, :erasure notes, semi government bonds that issued by states. In terms of maturity Errol teen can De Lastingness as snort term (notes or Dells), mid-term Ana long ERM bonds.
It is also financial instrument of ARAB to control inflation rate and cash low. Australian is a low debt growth economy and government debts provide several Signifies to investors (Dale, 2011): * Stable political system Government debts has AAA rating by S$P and Moody’s * Monetary policy aims to maintain inflation rate at targeted rate * The Banks are nightly regulated by PAR * Long term low unemployment rate * High liquidity n recent years global debt market were facing several issues whereas Australian majestic markets have benefited from strong foreign demand for Australian dollar ;securities.
Debacle (2013) stated that local issuers remain to be viewed favorably by )offshore investors. Yields can be reduced according to risk of the debt. With a stable Roth of economy and financial stability Australian Commonwealth Government securities (CSS) were rated AAA by Moody’s and S&P. Yields on CSS along with ;mi-government bonds (SUB) have declined and moved in appliance with global {overspent bond yields. Graph 3 clearly demonstrates declining trend of Australian preferment Bond Yield over last 10 years. Graph 3. He large amount of CSS purchased by offshore investors and demand remains ;throng (Graph 4). The percentage of overseas ownership has slightly declined from its Kea in recent years. Due to ADD exchange rate decline, some international investors nave sold CSS but net purchases have still sustained, Just not in appliance with the ace of supply (Debacle, 2013). The percentages of foreign investors in semis were -elatedly stable over the last six years. Graph 4. EGGS and SUB outstanding have significantly amplified in recent years.
Only from ‘ginning of 2005 till June 2011 , semi-government bond outstanding has increased tom $Bonn to $Bonn (Graph 5). CSS outstanding has increased even higher. $Bonn of outstanding semi-government bonds were issued to finance apartment-owned corporations that provides essential services to the public. _ancestor and Dowling (2011) stated that the demand for SUB is to be expected to Spurn over coming years due to the implementation of Basel Ill reforms. It requires ‘ankhs to hold higher levels of liquid assets at the Reserve Bank of Australia, which include CSS as well as SUB.
Graph 5 Roth of SUB mainly driven by two states (Queensland and NEWS) that represent two :hired of total SUB market (see Table 4). At least 85% of total SUB is long term debt at even time as the issuing state treasury corporation obligates to sustain a minimum mount of outstanding in the bond at any given time to stimulate and sustain the ‘nod market. Treasury corporations also issue short term notes in order to manage rent cash flow. Gained capital is mostly allocated to support the electricity and water sectors.
NEWS Treasury Corporation and Queensland Treasury Corporation had :total loans outstanding to the water and electricity sectors amounting around $25 Zillion and $22 billion, correspondingly, as at June 2010 (Lancaster ; Dowling, ) some states nave sousing to prattle electricity sector Ana support maintenance with private funds that would reduce issuing SUB as Victoria state did n 1990. Public Trading Enterprises (Pets) are long term that requires long term investment. For that reason treasury corporations prefer to supply debt market with Eng term bonds as possible and borrow capital for longer period.
But CSS delivers ‘remarry pricing for the domestic yield curve, and therefore it is problematic for SUB be issued at longer maturities than CSS. The weighted average term to maturity of :he CSS market (5. 0 years) is slightly shorter than that of the SUB market (5. 5 years) see Graph 6). Graph 6 kicking by their corresponding state governments has intended investors that credit -sis for state treasury corporations to be low. As a result Sibs has started trading at :eight spreads to CSS (Graph 7). However, during SGF, SUB spreads commonly widen, investors preferred to switch to the safest and most liquid securities which was ZOOS.
The Australian Government implemented a guarantee scheme for state and :rewriter borrowings in March 2009. It helped Sibs to trade as the risk was reduced ‘y government support during SGF. It allowed security issuer to guaranty any new or ‘resent ADD bond by paying certain fee to the government. Situation has improved ;nice SGF with spreads retrieving most of the spreading that occurred during SGF. In sat a few years NEWS and Queensland treasury corporations started reducing outstanding guarantied securities by payback as unguarded bond became less :costly to issue than guaranteed bond (Lancaster & Dowling, 2011).
Conclusion Wisterias debt market is highly regulated by the government in order to protect ;upper funds and retail investors from losing whole investment which happened curing SGF with many funds in US. Due to regulation and the fact that Australian Uncial institutions were focusing in financing of domestic market during SGF rather :Han investing to US Cods’, saved Australian economy from collapse and created high jammed for ADD bonds among offshore investors. That also reduced yields of preferment and semi-government securities as it is correlated to risk of the bonds “Notes” if it is short term).